At Huffle, our mission is to help home owners get onto the housing ladder and then have a happier, lower risk way to look after the financial burden that comes with a home loan.
Joining forces with others or having a larger deposit does lower the risk and cost – but what is being done by banks to actually help reduce the risk in the loan product? We think very little and it is a great shame. It isn’t even that difficult to look at what potential answers would be and here is a simple example.
How much can we borrow?
Lenders assess what is called serviceability: can you make all the due payments on a home loan. This is done by looking at your income and expenses and assuming that interest rates will rise 2% or 3% from current levels. This means that lenders will assume an interest rate on a variable mortgage may be as high as 7%. Can you afford to pay this? Obviously 7% interest rates will have higher monthly payments that 4% or 5%, so the total amount you can borrow may not be enough to buy the right home.
Easy solution: Long-Term Fixed Rates
There is a huge shortage of long-term fixed rate home loans in Australia. No lender offers an appropriate product: fixed for long enough so that interest rate increases are not a problem and with the flexibility to leave early if you move home. Compare this to the United States, where 90% of all home loans are of this type: borrowers get a much better deal on the other side of the Pacific.
If your home loan was fixed, say at 5% for 10 years, then you can say that there is only a very small risk of interest rate increases and an assessment on the borrower can be how much can you borrow at just 5% interest rate.
Ignoring the deposit requirement, you can lend between 10% and 25% more if it is long-term fixed rate than a variable rate for the same serviceability assessment. Having a long-term fixed rate reduces borrower risk to interest rate increases, meaning a lender can offer a larger loan.
What about 2,3 or 5 Year Fixed Rate Home Loans?
This simply isn’t long enough: you will have a mortgage for over 10 years, with the average mortgage taking 17 years to fully pay off. 10 years or longer is the required fixed period so that enough of the mortgage is paid off before you need to refinance to another fixed or variable rate or move home – and at that point interest rates could be higher or lower.
What if I want to move before year 10?
Simply put – lenders need to offer fixed rate loans without early break fees and with no repayment and refinancing restrictions. Then you can move home with cost or burden and obtain a new fixed rate mortgage.
This would be a real piece of customer innovation and is one of the products we are bringing to Australia. This can help Millennials onto the housing ladder and those already on it that are a little concerned about interest rate increases.